The yen soared to a six-week high on Friday, strengthening as much as 1% to 150 per dollar, fueled by unexpectedly robust inflation data in Tokyo. The surge bolstered market speculation of a potential interest rate hike by the Bank of Japan (BOJ) next month, sending ripples through the global forex market.
Meanwhile, the dollar faltered against major currencies, as holiday-thinned trading in the U.S. dampened momentum. Sterling hit its highest levels since November 20, and the euro clawed back gains, nearing its weekly peak.
The yen gained significant ground after Tokyo’s core consumer price index (CPI)—excluding volatile fresh food costs—rose by 2.2% in November, surpassing the anticipated 2.1% increase. The acceleration from October’s 1.8% reading has intensified chatter about a possible BOJ rate hike during its December 19 policy meeting.
Market sentiment currently reflects a 60% probability of a quarter-point hike by the BOJ, with just over half of economists in a Reuters poll concurring. These expectations contributed to the yen’s impressive weekly performance, where it reclaimed approximately 3% against the dollar.
However, not all experts share the optimism for immediate action by the central bank. Shoki Omori, a strategist at Mizuho Securities, cautioned against reading too much into the latest data.
“Real service consumption, which carries significant weight in the Tokyo CPI index, is gradually picking up but is not yet enough for the BOJ to pivot towards a rate hike,” said Omori. “Demand-pull inflation is still unclear, and the government remains focused on overcoming deflation, as indicated by preparations for a supplementary budget.”
Omori predicts the dollar-yen pair, which dipped to 150.09 as of 0129 GMT, may recover above 152 by the year’s end due to technical oversold conditions.
The dollar index, which tracks the greenback against a basket of major currencies, slipped 0.18% to 105.88. The decline marks a continuation of the dollar’s struggles this week, putting it on track for a 1.5% slide—its worst performance in weeks.
Despite the recent slump, the dollar remains on pace for a more than 2% gain in November, bolstered by a 3% surge in October. These gains were driven largely by investor optimism surrounding former President Donald Trump’s decisive election victory earlier this month, which heightened expectations for inflationary fiscal policies.
However, the dollar’s strength has been undermined in recent days by falling U.S. Treasury bond yields and renewed safe-haven demand for the yen. The latest currency movements also reflect concerns over Trump’s trade rhetoric, particularly his broad tariff warnings targeting Mexico, Canada, and China.
The British pound continued its ascent, rising 0.16% to $1.27085, after earlier touching $1.2712. Sterling’s recovery marks a rebound from losses earlier this month, as optimism about domestic economic resilience buoyed sentiment.
The euro also regained momentum, adding 0.13% to $1.0568. It approached Wednesday’s one-week high of $1.058775, recovering from a slight dip in the previous session.
The shared currency faced headwinds from flat German consumer price data, which defied expectations of a second consecutive monthly increase. Additional pressure stemmed from dovish comments by European Central Bank (ECB) policymaker Francois Villeroy de Galhau, who suggested the central bank could consider a more significant rate cut in December.
Budget disputes in France added to the euro’s challenges, though the currency’s modest rise on Friday indicates resilience amid broader dollar weakness.
Tokyo’s latest inflation figures represent a significant data point for policymakers and traders alike. The 2.2% year-on-year rise in core CPI underscores persistent price pressures in Japan’s capital. This uptick, however, comes against a backdrop of mixed economic signals.
While real service consumption has shown improvement, spending on non-durable goods remains sluggish. These mixed indicators raise questions about the sustainability of inflationary trends in Japan, a country that has struggled with deflationary pressures for decades.
The BOJ’s ultra-loose monetary policy has been a cornerstone of its efforts to stimulate growth and combat deflation. A potential pivot towards tightening, as speculated by markets, would mark a significant shift.
The yen’s rally and the dollar’s retreat highlight shifting dynamics in the global forex market, with inflation and interest rate expectations playing a central role.
- Safe-Haven Demand: The yen’s appeal as a safe-haven currency has been bolstered by geopolitical concerns, including Trump’s tariff warnings and ongoing global trade uncertainties.
- U.S. Policy Outlook: Falling Treasury yields and expectations of less aggressive Federal Reserve tightening have weighed on the dollar, even as the broader narrative of inflationary fiscal policies under Trump remains intact.
- Eurozone Challenges: The euro faces a delicate balance, with dovish ECB commentary and budget disputes in key member states offsetting some of the currency’s recent gains.
